Analysis Of Macroeconomic Factors Affecting Australian Economy

The Australian economy and its performance

Australian economy is one of the largest mixed economy around the world that has been growing through the last three decade by a high rate. With almost 8.9 trillion USD Gross Domestic Product (GDP), Australian economy is acknowledged as one of the fastest growing developed nation that has good amount of performance from all of its macroeconomic factors (Bramble 2015). As per the nominal GDP Australia ranks 19^th and when it comes to the Purchasing Power Parity, then it ranks 13^th among all the nations around the world making it an ideal state where the economic factors are performing as per the requirement of the state (Poon 2017). Australia has been going through its 27^th consecutive year of growth, which is mainly driven by the robust performance of the agricultural and mining sector. In addition to this service sector of the Australian economy has aided the economy to become where it now and the secondary sector has helped the Australian economy to become strong that can withstand against the market crunches (Robinson et al. 2015). Australian economy has been rising, however, the Real GDP growth rate of the state has been falling over the last few years.

Under this scenario, this report is aimed to analyse various macroeconomic factors that are being affected by the change in the Real GDP growth of the Australian economy. Through this analysis, it will try to provide insight, how the Australian economy has been growing through the last few years and how the economy will be within next few years. To conclude it will provide a brief overview of the findings and portray the recommendation to deal with the situation of the Australian economy.

In case of the Australian economy, there lies a negative relation between the Real GDP growth rate of Australia and the inflation. As the state has been facing rise in Real GDP growth rate, in inflation over the years has fell gradually (Mathews 2017).

Figure 1 depicts the fall in the inflation with the rise in the Real GDP growth rate. As it can be seen that, with the rise in the Real GDP growth rate, there has been fall in the inflation rate over the years.

Table 1: Summary statistics of Real GDP growth rate of Australia and inflation

Source: (Created by Author)

Table 1 and 2 highlights the phenomenon that with the rise in the Real GDP, there has been fall in the inflation as the price of the goods and services eventually fell with the rise in the potential of production of the Australian economy (Tung and Thanh 2015).

Inflation and Real GDP growth rate relation

 Table 2: Correlation between the Real GDP growth rate of Australia and inflation

Source: (Created by Author)

In case of the Australian unemployment and the Real GDP growth, there is also a negative relationship as with the rise in the country’s growth, more job creation has been there, which has aided it to reduce the unemployment. 

Figure 2: Paired graph of Unemployment and Real GDP growth rate connection

Source: (Data.worldbank.org 2018)

From the figure 2, it can be seen that, with the rise in Real GDP of the economy, there has been sharp fall in the inflation rate over the years.

 Table 3: Summary statistics of Unemployment and Real GDP growth rate connection

Source: (Created by Author)

From the figure 3 and 4, it can be found that Australian economy has been facing negative relationship between the Real GDP growth rate and the unemployment rate. As the economy moves forward, more job has been created leading to fall in the unemployment rate (Mathews 2017).

Table 4: Correlation between Unemployment and Real GDP growth rate connection

Source: (Created by Author)

Business cycle is one of the essential macroeconomic ideas that provides ability to deal with the unexpected market crunches. As per the theory of the business cycle, there are five stages in the growth path of an economy, which are expansion, peak, recession, contraction and tough period (Kydland et al. 2016). In the cyclical manner these five phases tends to appear in all the economies and following the trend, policymakers can keep themselves well aware of the phenomenon. Under the business cycle theory, expansion stage comes into action, when the state is rising and it reaches peak, when all the economic factors are performing at their best. Post the peak period, there comes the recession, when the price of the good and services start to rise. Flowing this comes the contraction, when the productivity of the economy falls and lastly there is tough period, where the productivity falls to its lowest point and other macroeconomic variables like unemployment, inflation reaches to their max point (Vegh and Vuletin 2015).

Considering these phenomenon it can be said that Australian economy has been going through the expansion stage as the economy has been facing large amount of shift in its GDP rate. As the figure 3 depicts, Real GDP of the economy has been increasing at a moderate rate highlighting the fact that it has been going through the growth stage, where the macroeconomic factors like export, employment has been rising contrary to the fall in the unemployment rate and the inflation (Murray 2017).

Unemployment and Real GDP growth rate connection

In case of the Real exchange rates and net exports of the USA and Australia, there lies a negative relationship. As the real exchange rate of Australia rises it leads to fall in the net export owing to the fall in the demand of the Australian goods and services in the US market (Nevile 2016).

From the figure 4, it can be seen that with the small fluctuation in the real exchange rate, there has been large amount of shift in the net export of Australia.

Table 5: Real exchange rates and net exports of Australia and USA Summary statistics

Source: (Created by Author)

Table 6: Real exchange rates and net exports of Australia and USA Correlation

Source: (Created by Author)

As the table 5 and 6 depicts, there has been negative relationship between the net export and the Australian exchange rate and the mean of both highlights the same (Cole and Nightingale 2016).

There has been strong relationship between the Fed rate and Cash rate, however, it changed post 19^th century. With the rise in the Fed rate, since then, Cash rate started to fall and vis-à-vis (Downes et al. 2014).

As it can be seen from the figure 5, cash rate as of now is rising, whereas the Fed rate is falling showcasing inverse relationship between these two factors.

Table 7: Summary statistics of Cash rate and Fed rate

Source: (Created by Author)

From the table 7, it can be perceived that mean cash rate is 5.33, whereas the mean Fed rate is 3.95. With the deviation of 2.52 and 2.09 for the Cash rate and Fed rate respectively, both are stable, however, Cash rate has been facing highest amount of fluctuation in recent days between these two indicators (Apergis 2014).

Australian cash rate and the US Fed rate are closely related with the each other. Historically there has been a trend to follow the Fed rate while adjusting the cash rate, however during the late 90s the phenomenon changed (Hartnett and Romcke 2015).

Table 8: Correlation between the Cash rate and Fed rate

Source: (Created by Author)

Presently, Cash rate moves to the opposite direction of the Fed rate that means, as the Fed rate rises, Cash rate falls leading to rise in the difference between both. Depending upon the market stability, Australian government believes that lower cash rate will gain much amount of investment. As per the table 8, it can be envisaged that, with the rise in the Fed rate, there will be rise in the Cash rate by 38% that highlights the level of association between these two variables (Bhutta and Keys 2016).  Thus as the Fed rate moves higher, Cash rate remains at low point, however, it changes marginally in the same direction.

The business cycle theory and Australian economy

Australian economy is acknowledged as one of the largest economies around the world that has been evolving at a large rate since the last three decades. Depending upon its primary and tertiary sector, the economy has become one of the largest nation around the world that has faced rapid growth in GDP and subsequently inflation and unemployment has fell gradually (Caputo and Herrera 2017). Over the year growth in the net export aided by the favourable exchange rate situation has made the country to become where it is now. In order to forecast the economic performance of the Australian economy, following table can be considered (Mirkov and Nativik 2016).

Table 9: Correlation between the several macroeconomic parameters of Australia

Source: (Created by Author)

As per the table 9 there has strong relationship between the Real GDP growths with all the macroeconomic factors. With rise in the Real GDP, unemployment, inflation as well as the cash rate tends to fall (Duarte et al. 2017).  This highlights the fact that, as the Australian economy moves forward while enhancing the Real GDP growth rate, more people gets employed and the price of the goods and services in the domestic market fall. Subsequently cash rate falls due to the fact that inflation rate comes under control and the requirement of the foreign investment fells owing to the rise in the private domestic investment. This change in the macroeconomic variable through the change in the Australian Real GDP lead to alteration in the trade balance as well (Hamilton et al. 2016). As the economy moves forward, exchange rate of the economy rises that gives rise to the importable and leads to a fall in the exportable. Under this circumstances, there will be fall in the net export with the rise in the Real GDP growth rate. Considering this feature of the Australian economy, it can be said that the state is expected to become one of the largest economy in the future (Markovic et al. 2016). As of now, Real GDP growth rate of the Australian economy has been falling and it will give rise to the net export. With robustly performing agriculture and the mining industry of the state and depending upon the service sector it can become the largest energy exporter in the world by next decade. On the other hand, as the GDP of the state has been rising, it has potential to rank higher as per the sustainability in future (Rey 2016). Presently it is going through the growth stage and the chance of facing another Global Financial Crisis like situation by the state is low due to its versatile economic framework and strong domestic market.

Real exchange rates and net exports of Australia and USA

Conclusion:

From the above discussion it has been found that the Australian economy is one of the largest mixed economy in the world where all the sectors of the economy has participated by a large share in the structuring of the domestic economy. With the robust network of service the economy has gained most of its GDP and when it comes to the primary sector, then it has provided Australia to maintain a strong trade balance. As the economy of the state has been moving forward it has gained much amount of prosperity through the rise in the export and strong economic quality of the domestic economy. Moving forward the report has found that the state as of now is going through the growth stage, where its various macroeconomic factors are expanding by a large extent. To conclude it can be stated that the economy has high potential to become one of the largest economy around the world with its large amount of domestic market and the favourable trading conditions. In order to gauge the present situation and make the future of the Australian economy more stable, it is necessary for the Australian government to bring in strategies that can aid the Australian export market and aid it to become the largest exporter of the natural resources like coal and others. Proper exposure from the international market can lead the Australian economy to better sustainability and market the economy prosper in coming days.

Reference:

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